A new report by the Federal Reserve Bank of New York has found that the massive investment in grants and student loans by the federal government is a major contributor to the unbridled growth in the cost of attending college.
College tuition rates have consistently risen faster than inflation for some 25 years. One theory for the rise, dubbed the “Bennett hypothesis,” was put forward by Ronald Reagan secretary of education William Bennett, who argued that hikes in government student aid simply gave colleges a free pass to hike tuition.
Now, the New York Fed’s research suggests there’s some merit to the idea, and that it means the government could be spending billions on education to no effect.
“While one would expect a student aid expansion to benefit recipients, the subsidized loan expansion could have been to their detriment, on net, because of the sizable and offsetting tuition effect,” the paper concludes.
On average, the report finds, each additional dollar in government financial aid translated to a tuition hike of about 65 percent. That indicates that the biggest direct beneficiaries of federal aid are schools, rather than the students hoping to attend them.
The numbers were not quite as grim for Pell Grants, where 55 cents of each additional dollar turned into higher tuition, but it was even worse for subsidized student loans (the most common type of aid), where every dollar loaned translates to a 70-cent tuition hike.
The report reached its conclusion by comparing tuition levels at different schools and determining the percentage of students at each who were able to make use of Pell Grants and more-available student loans. The evidence showed that schools where students could access more aid were also able to impose higher tuition levels, with the effect strongest at expensive private schools that are reasonably selective but not among the most elite schools in the country. Such an outcome, the paper theorized, was because these schools have a high number of students who rely on taking out a large volume of loans in order to attend school.
The researchers also found that for-profit, publicly-traded schools had their stocks tick upwards whenever the government expanded its financial aid availability.
In the long-run, federal aid could actually be making college less accessible on average, because higher tuition will also affect individuals who aren’t able to access federal aid. As a result, while financial aid is costing the government hundreds of billions while also causing a huge surge in debt among young Americans, it may be having a very marginal effect on access to education.
The new report adds substantially to earlier research that has been mixed on the topic. A 2012 paper by Harvard and George Washington University economists found that student aid at for-profit colleges mostly translated to higher tuition, and a 2007 paper found that higher Pell Grants drove up tuition at private schools as well as out-of-state tuition for public schools. Other papers, though, have found no evidence the Bennett hypothesis is true. One expert urged policymakers not to embrace the new study too quickly as a justification for slashing federal aid.
“Nobody in their right mind believes that a $5,775 federal Pell Grant causes a college to charge $50,000 to $60,000 a year,” financial aid expert Mark Kantrowitz told the finance website ThinkAdvisor.